Brazil's Incredibly Shrinking Petrobras

Brazil's former President Luiz Inacio Lula da Silva showing his hands dirty with the first extraction of pre-salt oil, at the Petrobras platform in the Tupi oil field in the Atlantic Ocean on October 28, 2010. As an investment, Petrobras isn't what she once was in the Lula years.

In 2008, a few months before the end of the world, Goldman Sachs gave Petrobras a price target of around $60. Today, it is trading at $20 a share, will undoubtedly fall below that before the day is done, and it is arguably the black sheep of big oil plays in the hemisphere.

From it's multi-billion dollar secondary share offering a few years back that spooked investors worried about the government controlling even more of the company while it diluted shares of minority holders, to the government keeping a lid on fuel prices that capped profits, Petrobras is the class state run entity. It doesn't exist to make shareholders profits. It exists for the commonwealth.

But when investors saw Petrobras lose another billion Brazilian reals last quarter, it just gives them another reason to avoid the firm, and maybe even avoid the old commodity investment thesis in Brazil altogether. And why not? China is slowing down. All the mining and steel majors in Brazil are struggling. Shares are down across the board. These guys are duds.

Petrobras shares in New York are down over 18 percent year to date, while the iShares MSCI Brazil (EWZ) exchange traded fund, which tracks the BM&F Bovespa index is down just bout 6 percent.

To add insult to injury, Petrobras reported its worst earnings in over a decade on Friday, citing the currency's 10 percent depreciation against the dollar.

"We are working to recover our profitability," said Chief Executive Maria das Gracas Foster, who took over from Jose Sergio Gabrielli in January, in a statement.

Foster faces a difficult task. Petrobras has seen its profits erode over the past year. It doesn't have the refining capacity to make gasoline to meet demand, so it has to import it.

The company recently said it would be producing less oil out of its deep ocean wells far off the coast of Rio de Janeiro. Even when oil prices were rising, Petrobras shares didn't follow the trend. While investors seemed happy with a more realistic view of the company's oil wealth off shore, the shares of Petrobras in the U.S. have struggled to stay in the 20s for months.

Investment firms will be repricing Petrobras in the days ahead. Long gone are Goldman's $60 days for Brazil's biggest oil company.